Corporate Governance in India: The Rise of the Minority Shareholder

It was heartening to see in a recent edition of the Economic Timesthat the Securities and Exchange Board of India (SEBI) would likely discuss an overhaul of its corporate governance code at a board meeting the next day.

This is consistent with what is happening throughout Asia. As documented in our 2010 report Shareholder Rights in Asia, we too have noticed the trend of growing shareholder activism. Unlike in the past, when the response was to sell shares in companies that exhibited poor corporate governance behavior, shareholders are now more willing to engage with the company boards and managers to safeguard their investments.

obtain relevant and material information on the company on a timely and regular basis

participate and vote in general shareholder meetings

elect and remove members of the board

share in the profits of the company

In addition to incorporating the above, SEBI’s consultative paper engenders greater shareholder activism, including mandating e-voting for all resolutions of a listed company to promote greater participation; having stricter rules on related-party transactions; strengthening private-sector enforcements through improved investor education and better participation at general meetings; and regulatory support for class actions suits.

Additionally, due to the importance that institutional investors play in engaging with public companies, the recommendations now require these organizations to exercise greater fiduciary responsibility and stewardship on their investments. These include:

having a clear policy on voting and its rationale

dealing with conflicts of interest

having a policy on monitoring investee companies

cooperating with other investors to engage with the company where appropriate

knowing when to have an active intervention on company matters

addressing disclosure concerns by regular reporting on engagement with companies

In India, the need for good corporate governance is not a new concept. In fact, 10 years ago at the Global Corporate Governance Forum in Paris, G. N. Bajpai, then-chairman of SEBI, stated in his address that corporate governance is the conduct by companies (as the main economic agent of the country) to “produce synergies for all other agents in the economy.”

His view extends the concept that running a corporation well is crucial for the economic prosperity of the country, such that both “the state and market have to co-exist and complement each other’s effort.” Where failures in corporate governance occur (particularly by the larger firms), there will be economic repercussions for the entire country. And when this impacts the lives of people in the country, state intervention becomes necessary. In Bajpai’s view, running a company well is not only good for its owners, but also for the country. And the foundation of good corporate governance “must be an unwavering commitment to integrity” and “an undying commitment to serve the investor.”

With these changes coming, it looks like India is forging ahead in its quest to improve the governance practices of public companies and, if done correctly, could lead to what Bajpai calls the “triumvirate of Indian values”: satyam (ethical business practices), shivam (serving society), and sundaram (morality in behavior).

Let’s all stand up and applaud the impending rise of minority shareholders in India!

9 comments on “Corporate Governance in India: The Rise of the Minority Shareholder”

Thanks BD. One thing we hope to do in India this year is to encourage greater minority shareholder participation at the general meetings. We have roped in the advocacy team at the Indian Association of Investment Professionals (IAIP) to develop an AGM guide, which we will be promoting sometime in the middle of the year when the general meetings process starts.

This is indeed good news. What is characteristic of countries such as India is the dominance of business groups. Business groups and good corporate governance usually do not go hand-in-hand. Any particular evolution in the way business groups are structured and address the corporate governance issue?

Thanks Barbara for the comment. One of the issues with business groups and not-so-good corporate governance practices concerns related party transactions. The new revisions hope to address those issues.

However, another issue exists in these dominant shareholders situation. They may not have good corporate governance practices, but they may perform better than those with good corporate governance practices because of their network of contacts. Here’s the dilemma shareholders face: share performance or acceptable corporate governance practices?

Though such changes are welcome, the moot question is whether they will be seen across the board – whether CG will be followed not just in letter, but also in spirit in companies of hues: large-cap companies, small-cap companies, government companies and even MNCs.In the past, I have personally participated in AGMs of multi-national companies (MNCs), where I have seen questions of minority investors being brushed aside by the management. Management in India always accords importance to institutional investors, but minority, retail investors are often treated like trash. I think institutional investors ought to take the lead in ensuring that rights of minority investors are protected. Unfortunately, unlike in the U.S., institutional investors in India have rarely participated actively in AGMs in opposing resolutions which are against the interests of minority investors. Rather, institutional investors are often seen hand in glove with the management. This picture has to change.

Thanks for your comment. All this will take time, but it really starts with the individual shareholder making the effort to question directors at AGMs intelligently. I have personally seen in Singapore how individual shareholders are now questioning directors more at AGMs, whereas in the past, it was only a few. In partnership with the local society, the Indian Association of Investment Professionals, we are currently working to produce an AGM guide for investors to use as reference material for such purposes. In the words of an old Russian saying, “The lake start with the first drop of water.” I think individual shareholders like yourself play that important role.